Credit Managers' Index for February Suggests Robust Future for the Economy

The Credit Managers' Index (CMI) is now sitting at 55.8, rising a full percentage point above January's reading. The index is at its highest since April 2011, a time when most indicators were pointing to a pretty solid year. Readings from this month are strong in key categories providing some confidence regarding what happens from this point.

The sales number is one of the most watched and it reached a level not seen since last April (64.4). "Once there is positive movement in the general sales category, there is often improvement in the index of unfavorable factors as well," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). "An expansion in sales allows companies to catch up on their debt and improve their overall credit standing." Dollar collections jumped as well, dramaticallyâ€”from 56.8 to 63â€”and like the expansion in sales is a sign of improved business conditions. More positive movement came from the amount of credit extended, which rose slightly from 63.3 to 64.3. "This bump in overall business activity is a precursor to additional expansion," Kuehl added. The only decline for the month was in new credit applications, which fell from 61.9 to 59.5. It was not a big drop, but suggests that many of those that were looking to expand and needed credit have already made their move.

The index of favorable factors rose from 61.4 to 62.8, marking the best reading since February 2011. This is also the third month in a row that the favorable factors index has been over 60. The index of unfavorable factors has also shown improvement as it moved from 50.3 to 51.1. "The damage from the recession is still manifesting in the unfavorable categories, but at least the index has remained above 50 for the past four months, and the current reading is better than it has been since April of last year," said Kuehl. "The theme here is that the CMI is about where it was in the spring of 2011, a period during which optimism was peaking. The problem in 2011 was that conditions deteriorated sharply after that peak and by the middle of the summer, the economy was back in the doldrums and the CMI was reversing course swiftly." Last year, the shocks that sent the economy reeling included the hike in oil prices and the supply chain crisis precipitated by the disasters in Japan. Thus far, the 2012 economy has not been visited by a crisis of that magnitude, but the recent hike in oil is not welcome in reminding business of how fragile the recovery remains.

There was not a great deal of movement in unfavorable factors, but for the most part the movement was positive. "There has been very little real shift in the numbers since this time last year, but the good news is that four of the six unfavorable factors are now over 50 and that is an improvement over last month when there were only three indicators trending in expansion territory," said Kuehl.

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Biggest Manufacturing Bankruptcy in Japanese History a Reason for Greater Concern?

In Japan, the largest manufacturing bankruptcy in the nation's history was declared this week as Elpida Memory Inc. found its liabilities in the neighborhood of $5 billion far too great to overcome without restructuring. While bankruptcies in Japan have been very rare, this slow-growing trend certainly warrants attention from anyone doing business with a Japanese-based company.

The computer memory chip manufacturer, once a big part of a booming exporting industry dominated by Japan, has had trouble keeping up with foreign counterparts. The bulk of that competition, driven by lower costs, comes from outfits in South Korea, primarily Samsung. Also harming Elpida and its in-country contemporaries is that its chips are used for computers and laptops, not necessarily the increasingly popular devices such as smartphones, tablets/eReaders and similar products. But, as discussed at length in the feature "Falling Sun" in the March issue of Business Credit, straight competition and changing consumer demand are far from the only factors plaguing Japanese businesses.

The overvalued yen, which has become a bit of a magnet as investors leave the unstable euro, has made it harder for Japanese-based exporters to compete financially and threatens Japan's long-held trade strength. NACM Economist Chris Kuehl, PhD said its part of why he's deeply worried about Japan from a business, credit and economic standpoint.

"It's a little confusing. The yen has become so strong, too strong, and there's no real reason for it," Kuehl said. "They're looking at a near collapse of their export market. For the first time in 30 years, they're looking at a trade deficit."

As such, Japanâ€”never known as a country where corporate bankruptcies were very likelyâ€”could be seeing its fortunes change...and not for the better.

"Japan has a more complicated system of bankruptcy, and people have always thought about it as a place that is totally safe [from a credit perspective]. You need to rethink that," Kuehl warns. "There's a very cozy relationship between banks and businesses but, if for some reason banks think you don't have much of a future, problems will occur immediately. They look perfectly fine until backing vanishes, and then they're gone immediately."

Small Businesses Feel Excluded from Obama Corporate Tax Proposal

President Barack Obama released a new business tax proposal last week, followed closely by comments and criticism from money-minded members of Congress. Broadly speaking, the Obama Administration's proposal to cut the corporate tax rate to 28% has received fairly positive reviews from both sides of the political aisle. Officials and business advocates that dug into the details, however, found a bit more to criticize.

Chief among their concerns was the Obama proposal's continued reliance on a minimum tax rate for overseas earnings by multinational firms, regardless if that money ever makes its way back to the United States. Critics consider the minimum rate to be a form of double taxation.

"Even the president's own Bowles-Simpson Commission recommended abandoning this system, which the rest of the developed world has already done," said House Ways and Means Committee Chairman Dave Camp (R-MI), whose comments were echoed by the U.S. Chamber of Commerce. "It's appropriate for the White House to acknowledge that the corporate tax code stifles economic growth, undermines the competitiveness of U.S. firms and needs reform," said Chamber President and CEO Thomas Donohue. "However, we're disappointed the White House proposal does not adopt a territorial tax system that would put an end to the double taxation of profits earned by U.S. companies overseas. America is the only major country that disadvantages its own firms competing globally. These companies employ millions of Americans here at home and make significant contributions to our economy."

Without getting too specific, the National Federation of Independent Businesses (NFIB) criticized the administration's corporate tax proposal for being just that: a corporate tax proposal. "The focus should be on individual rate reform," said NFIB CEO Dan Danner. "Reforming the corporate tax code does not help the majority of small businesses; in fact, it creates even more uncertainty by taking away the deductions that many small business owners count on each year. Furthermore, as complicated as the tax code is, this plan from the administration will make it even more complicated for a small business owner."

"Once again, President Obama has demonstrated that he knows big business, not small," he added. "At what point does big business stop dictating the policies in Washington, DC?"

Jacob Barron, CICP, NACM staff writer

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Committee Calls for Swift Reauthorization of Ex-Im Bank

A group of senators from the Committee on Small Business and Entrepreneurship have called for the immediate reauthorization of the U.S. Export-Import Bank (Ex-Im).

The bank's authorization was last extended in December 2011 through the end of May 2012, at its current lending ceiling of $100 billion. Increased demand, however, has led Ex-Im to predict that it will hit its limit by the end of this month. Unless its authorization is renewed and its lending ceiling raised, the bank would be forced to halt all new transactions.

In a letter to Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY), Senators John Kerry (D-MA), Joe Lieberman (I-CT), Jeanne Shaheen (D-NH), Maria Cantwell (D-WA), Kay Hagan (D-NC) and Mary Landrieu (D-LA), chair of the Small Business Committee, urged the two to move on a reauthorization proposal as quickly as possible.

"The financing that Ex-Im Bank provides is a critical tool for small businesses to increase foreign sales. Congress must act to help these exporting entrepreneurs increase jobs and profitability here at home," they said. "Over the past 76 years, Ex-Im Bank has diligently followed its mission to enable U.S. companies to turn export opportunities into real sales. These sales, in turn, help maintain and create U.S. jobs which contribute to a strong national economy."

In Fiscal Year 2011, Ex-Im provided a record $32.7 billion in export financing, including an all-time high of $6 billion in export financing to small businesses, in total supporting $40.6 billion in export sales. The agency also still manages to turn a profit, having returned $3.7 billion to the U.S. Treasury since 2005. Most recently, Ex-Im opened a $100 million credit facility for small business exporters.

Jacob Barron, CICP, NACM staff writer

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Romney Fights Off Auto Bankruptcy Issue, Likely to Face it Again in Critical Ohio

If it was known months ago that Mitt Romney was going to win Michigan's primary by the slimmest of margins, it would have been seen as a loss, especially since Michigan is his home state and a swing state. However, after overcoming a poll deficit fueled by perceptions of Romney being anti-auto industry, his supporters celebrated Tuesday's Michigan win with vigor. But "Let Detroit Go Bankrupt" may very well haunt him in the even more important Ohio primary.

As noted in last week's eNews, Romney faced off against a considerable image problem largely based on the "Let Detroit Go Bankrupt" headline he penned as part of a now-infamous New York Times op-ed piece, as well as a surging connection with voters to the far right by opponent Rick Santorum. In the fall of 2008, Romney bashed President Barack Obama for the proposed bailouts of Chrysler and General Motors, noting a burden on taxpayers as a key critique, and continues to do so despite most analysts considering the bailout a successful effort.

Those issues will continue to play in the crucial Ohio primary on March 6 ("Super Tuesday") because of the state's similar reliance on the automotive industry. Though Romney's point was about ways to better manage the bankruptcies to improve the business prospects for the long-term health of the companies with no suggestions of a liquidation that would have caused millions to lose their jobs, the headline and eventual sound bite will undoubtedly be used and create an image issue he needs to conquer. Should Romney take the GOP nod, the auto bankruptcy bailout will certainly become a battle issue in both Ohio and Michigan in the context of a general election. After all, it was the first issue Romney publicly used to engage President Barack Obama after announcing his official candidacy. Considering the two states comprise the largest number of swing-state electorates other than Florida or Pennsylvania, the issue of the Chrysler and General Motors bankruptcies could very well be among the most important swing issues of the entire GOP vs. Obama race.

Brian Shappell, NACM staff writer

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Fed Beige Book: Expansion Continues...in Moderation

Contacts in all 12 Federal Reserve Districts reported that the last six-week tracking period of the Beige Book economic roundup has brought continued growth with manufacturing leading the charge.

Manufacturing's mid-winter increase was characterized as "steady" throughout the nation, with new orders, shipments and production up in most of the districts. Auto-related industries and those tied to capital spending, as previously noted in Business Credit and eNews, continued to thrive.

Agriculture and real estate were more mixed, depending on the locationâ€”but, for the latter, anything above across-the-board stagnation or loss for the reeling construction industry reads like a win.

Business credit quality and demand were stable or showed a slight uptick in districts including Cleveland, Richmond, San Francisco and Atlanta. There was particular middle-market strength in Dallas in that regard, and there was also a bump in large corporate lending in the Chicago district.

For overall growth, across all sectors, Philadelphia and Atlanta demonstrated the best six-week showing, according to the Beige Book. The East Coast duo was followed by the auto-friendly districts of Cleveland and Chicago as well as Kansas City, Dallas and San Francisco.

The good news was well-timed for a long-battered Fed Chairman Ben Bernanke, who was due on Capitol Hill Thursday to present the Semi-Annual Monetary Policy report to the House Financial Services Committee, where he has faced sharp criticism before election-mode lawmakers in recent months.

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New U.S. Trade Enforcement Agency Takes Shape

An executive order signed by President Barack Obama this week created a new trade enforcement agency within the office of the U.S. Trade Representative (USTR).

First proposed in his January State of the Union address, the Interagency Trade Enforcement Center (ITEC) will serve as the primary forum within the federal government for USTR and other agencies to coordinate enforcement of U.S. trade rights. It will also encourage greater participation among U.S. workers, businesses, farmers and ranchers in the identification and reduction or elimination of unfair trade practices and barriers.

Although it will operate within the office of the USTR, the president's fiscal 2013 budget splits the agency's $26 million budget between that agency and the Commerce Department's International Trade Administration. "President Obama took a major step toward leveling the playing field for American workers and businesses today in establishing the Interagency Trade Enforcement Center, a new trade enforcement unit to investigate unfair trading practices worldwide," said Commerce Secretary John Bryson. "The Commerce Department is committed to making it as easy as possible for U.S. businesses to build things here and sell them everywhere, because we know that when American businesses and workers get a fair shot, they can compete and win."

In his executive order, Obama stipulated that ITEC will coordinate enforcement matters with several other agencies, including the Departments of State, the Treasury, Justice, Agriculture and Homeland Security.

"This new trade enforcement unit will better enable USTR and the Department of Commerce to join forcesâ€”with the support and collaboration of partner agencies like Agriculture, Homeland Security, Justice, State, Treasury and the Intelligence Communityâ€”to ensure that America's trading partners play by the rules," said Trade Ambassador Ron Kirk. "It will help American workers and businesses compete and win on a fair global playing field."

Kirk will eventually choose ITEC's director, while Bryson will designate a deputy. The center will be ready to open within 90 days.